US Edition £19.25 +32p
Questor says BUY
Like a 40 fags a day man, Questor has long been hooked on Imperial. Through good and bad, we haven't been able to shake the tobacco habit, and despite more than a few bad patches recently, we're sticking the course.
Over the past nine months Imperial shareholders have had it hard. Higher tobacco leaf costs, a struggling Spanish economy – one of Imperial's key markets – regulatory worries in the UK and austerity fears have combined to derail share price growth.
While close rival British American Tobacco (BAT) has seen its shares climb 18.5pc since the turn of the year, Imperial was down 3.5pc heading into the company's trading statement on Wednesday.
Against that backdrop, a lack of bad news was well received. Net tobacco revenues are forecast to be 3pc higher – in line with management expectations – as the company benefits from growing demand for loose cut tobacco.
With that performance, the company does not look likely to unsettle its reputation as a defensive stock with robust earnings but investors will be hoping for more when Imperial unveils its full-year results in early November. Alison Cooper, the new chief executive, will be under pressure to prove that cost cutting and acquisitions are not the only thing Imperial has in its growth armoury and that she can power sales organically.
Nevertheless, analysts suggested on Wednesday that the valuation gap between Imperial and BAT has grown to unrealistic levels - a view Questor also holds. BAT's emerging markets strength leaves it well positioned, but Imperial proved with its trading update that it can continue to generate higher revenues from brands such as Davidoff and West despite falling cigarette sales in much of the developed world.
A dividend yield of 4.4pc is also not to be sniffed at. Imperial is one of the most attractively rated defensive companies in the market at 10 times September 2011 earnings per share.
Some in the City believe Imperial's depressed valuation makes it a potential takeover target. While that should help boost the shares, Questor doesn't expect a deal to surface. The tobacco giant had more than £11bn of debt in July, making a deal prohibitive for the time being, while the industry is already heavily consolidated, meaning that any suitor would have to jump through too many competition hurdles.
With austerity concerns growing by the day, Imperial is a habit Questor will be keeping.